4 Mental Keys for Better Trading

08/03/2011 3:30 pm EST

Focus: STRATEGIES

Gary Dayton

Founder, TradingPsychologyEdge.com

Trade psychologist Dr. Gary Dayton outlines four mind-based steps that can help traders build consistency and confidence and improve their results.

As traders, we focus a lot on the skills of trading and using the right methodology for the right market, but what about the psychological skills you need to develop as a trader as well?

Our guest today is Dr. Gary Dayton, here to talk about that. So, Dr. Dayton, give us an idea of the psychological things we need to develop to become successful traders.

I’m often asked what it takes to become successful in trading, because it is a difficult endeavor. And the truth is that it’s not going to be found in an indicator or a system. It’s going to be setting yourself with realistic goals, working hard at them, making mistakes, recovering from those mistakes, and continuing that process.

Here’s a few ideas that might be helpful for traders. One thing is—and we don’t often think about this, but it’s very helpful—that is to have a vision about your trading. What are you all about as a trader? What’s driving you?

And the best traders that I know, it’s never about the money. That can be found in real estate or corporate work; it’s always something different, and it’s going to be different for every individual trader. There’s no common themes there.

But it’s important to know and to clarify that, because as we all know, there’s a lot of adversity in trading. We have days of losses—weeks of losses, in fact—and we need that vision to help us overcome those tough times, so that’s one thing.

You also want to take your vision and put it into a daily mission. What do I mean by that? Sit down and list out the steps that are necessary to take yourself from where you are now to realizing that vision.

Write out a plan to do that. Keep a trading journal and track your progress in it. This is how we get good, and this is how we can achieve that vision.

Another thing that’s really important is to understand what you can control versus what you can’t control. We all know we can’t control the market, though we often try to do that. We also know that we can’t control the outcome of any given trade, but we all act as if we live and die on each individual trade.

Instead, understand what you can control. Those things are going to be your actions and your behavior. How you interact and how you relate to the market are things under your control.

And that leads us to the next step, which is to focus on the process of trading, not the outcomes.

The money side of the trade, the outcome of the trade, is less important than what you can control, which is the process of the trade. Things like identifying a clean trading set-up, making the entry, setting your stop, managing that trade, exiting the trade. All of that is under your control. All of that is process.
Focusing on the things that you can control is going to help you maximize your vision, and it’s going to lead to greater confidence in your trading.

Another area that traders tend to not focus on is the mental side of trading. Everybody’s focused on the technical side: Where is the best indicator, what’s the best system? The mental side is equally important.

You need to learn how to mentally park your losses or the errors that you make, and we’re all human; we all make errors.

We need to learn how to let winners run and cut losing trades short; very difficult to do. The practice of “mindfulness” and keeping a task-focused orientation is really important.

None of this is found in the price bars or the indicator. It’s all between the ears, and those skills are important to learn.

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